Opinion
14235
February 19, 1936.
Before BELLINGER, J., Richland, July, 1935. Affirmed.
Action by J.S. Blankenship and others against Simpson J. Zimmerman and J. Roy Barron, conservators-receivers of the Central Union Bank. From an order of the Common Pleas Circuit Court overruling defendants' motion for an order abating and dismissing the complaint, defendants appeal.
The complaint and the order of Judge Bellinger follow:
COMPLAINTThe plaintiffs herein, complaining of the defendants, respectfully show to the Court: 1. That the plaintiffs are residents of the State of South Carolina, and are the beneficiaries named in the will of J.B. Swann hereinafter referred to.
2. That Simpson J. Zimmerman, defendant, is the conservator-receiver duly appointed under the terms and conditions of law, and is acting under and by virtue of the authority conferred upon the board of bank control in the closing up and liquidating the assets of the Central Union Bank of South Carolina.
3. That under and by virtue of the terms of law the plaintiffs have duly applied to the Board of Bank Control for the privilege of bringing this action and that permission has been granted on May 28, 1934, by an order signed by I.C. Blackwood, Governor, authorizing the plaintiffs herein to bring said action in the Court of Common Pleas for York County, and that this action is being brought under the authority of said order and the authority of law.
4. That J.B. Swann departed this life on the ____ day of April, 1932, leaving of force his last will and testament, wherein he named the Central Union Bank of South Carolina executor, in which said will appears the following item, to wit: "Art. 9. All of the rest, residue and remainder of my estate, real, personal and mixed, of whatever nature wheresoever situate, to which I am entitled at the time of my death, either in law or in equity, I hereby give, devise and bequeath, share and share alike, to Mrs. R.F. Bankhead, Miss May Blankenship and John Swann Blankenship, Sr., the same to be theirs absolutely and forever."
5. That on the 25th day of April, 1932, the said will was duly proved and letters testamentary issued to the Central Union Bank of S.C. which immediately thereafter entered upon its duties as executor of said estate.
6. That included in the assets of said estate was a considerable amount of cash, and the executor on the ____ day of April, 1932, invested $10,000.00 thereof in a participation certificate in a pool of mortgages aggregating more than $68,000.00, and issued to the estate a participation certification for the said $10,000.00
7. That the said Mrs. R.F. Bankhead, Miss May Blankenship, and John Swann Blankenship, Sr., the plaintiffs, are the sole beneficiaries under the residuary clause of said will; that the specific bequests have been paid almost in full, only a small proportion remaining unpaid, and that therefore under the terms of the will, and by law, the legal title to the $10,000.00 is vested in the above-named plaintiffs, and that a naked trust was created by the will and the legal and equitable title to the residue of the estate vested in the beneficiaries named in Article 9 thereof.
8. That the said investment was not made under authority of an order from the Probate Judge of York County authorizing same, neither was the money invested in first mortgage on real estate, but on the contrary these plaintiffs allege that said investment was made knowingly, willfully and intentionally in a participation certificate in a pool which was secured by mortgages for vastly larger sums than the value of the real estate would warrant as a fit, proper or conservative investment; and that the Central Union Bank, in direct violation of the statute law of South Carolina, invested the $10,000.00 belonging to the estate of J.B. Swann and these plaintiffs under Article 9 of the will of the said J.B. Swann, in a participation certificate and that the said action on the part of the Central Union Bank was in violation of said trust and in violation of the law with reference thereto and is contrary not only to the terms of the trust imposed by the will of the said J.B. Swann, but is also contrary to Sections 9051, 7908 and 7909.
9. Section 9051, Code of 1932, requires the investment of trust funds by executors in first mortgages on real estate.
10. Section 7908 provides that funds held in trust shall be invested as soon as practical in strict accordance with the will and shall be invested in accordance with the terms of law of the State of South Carolina relating to such investments; that the investments shall be made by an investment committee, approved by the board of directors, and that all such investments shall be first approved by said committee and then by the board of directors and these plaintiffs allege that the said sections were not complied with, that the said money was invested in a participation certificate in a pool of worthless securities and that said investment is and was null and void.
11. That the records of the Central Union Bank show that this money which was turned over to it in trust was, by it, commingled with other moneys, was not invested in first mortgages on real estate, nor was it kept separate and distinct from other trusts, nor was the investment plainly marked.
12. That said investment was contrary to good business management and practice, was in absolute violation of law; that the property upon which it is invested was grossly inadequate then and now to secure any participation certificates, and that such was known to the said executor, and that there is a large sum which will be lost by the estate and these plaintiffs if it is allowed to stand; and that the said investment trust is in such condition that it cannot be completed in a number of years and that the purpose and intent of the testator hereinabove referred to has been completely defeated.
13. That in the proper management of the estate, and in the execution of said will, it was not necessary or essential to make the said investment; but that the Central Union Bank, executor, willfully, deliberately and intentionally took advantage of its fiduciary capacity, as such executor and perpetrated on the estate and these defendants a legal fraud by investing the cash belonging to the estate in a group of long-term worthless mortgages, and exceeded its authority in making such investment and was negligent in not holding the funds in the bank ready for distribution at the expiration of 12 months from the date of its appointment as executor.
14. That the plaintiffs did not consent to said investment, but on the contrary notified the bank that the funds would be needed at the end of the administration year, and were assured by the trust officer of the bank that the funds were on hand and would be so paid out.
15. That the Central Union Bank, in order to get title to, possession of and/or the use of the said sum of $10,000.00 in its own right took advantage of its position as executor of the estate of J.B. Swann and the privilege it had of handling the estate funds and knowingly, willfully, deliberately and intentionally invested the money in a group of mortgages which it held, thereby diverting into its own coffers and converting to its own use the said sum of $10,000.00, knowing that the security was inadequate, thereby breaching the trust reposed in it by the testator, and accompanied said breach with a legal fraud, and therefore, these plaintiffs allege that said transaction is illegal, is null and void as a matter of law, and that they are entitled to establish what in law is known as a trust ex maleficio and that these plaintiffs are entitled to have said amount above referred to set aside as a preferred claim.
Wherefore, plaintiffs pray:
1. That the amount herein referred to, to wit, the sum of Ten Thousand ($10,000.00) Dollars, with interest thereon found to be due, be declared a preferred claim on the ground that a trust ex maleficio is shown.
2. That the plaintiffs herein be given judgment against the defendants on such preferred claim for the sum of Ten Thousand ($10,000.00) Dollars and that the conservator-receiver be directed to pay over said amount to the plaintiffs under the terms and conditions of said trust and said will.
3. For such other and further relief as may be just and proper.
ORDERThe above matter came before me at Chambers, Columbia, S.C. on June 28, 1935, on the motion of the defendants asking for an order abating and discontinuing and dismissing the complaint heretofore filed and now pending in this suit, upon the ground that the plaintiffs have no right to maintain this suit while at the same time retaining and claiming the benefit of the participation certificate referred to in their complaint; the said motion being based upon the record in the proceeding, including the answer and return filed along with the notice of this motion.
The record in this proceeding shows that the defendants heretofore demurred to the complaint alleging that it failed to state facts sufficient to constitute a cause of action upon three grounds, one of which was that the complaint failed to state facts sufficient to show any breach of duty on the part of the bank as would entitle the plaintiffs herein to a preference as claimed in the complaint. This demurrer was overruled by the order of his Honor, J. Henry Johnson, presiding Judge, Fifth Circuit, which was signed and filed on March 7, 1935, wherein the defendants were given 20 days in which to answer the complaint, and wherein it was further ordered, "That no appeal from this order shall act as a supersedeas but said case shall proceed to hearing with all convenient speed on its merits."
The defendants claim that the complaint now pending in the above-entitled suit should be abated, discontinued, and dismissed on the ground that the plaintiffs have no right to maintain this suit while at the same time retaining the benefits of the participation certificate referred to in the complaint, since plaintiffs have not specifically disavowed and stipulated that they were not claiming the benefits of the participation certificate; that their complaint should be abated, discontinued, and dismissed unless they specifically elect at this time not to claim the benefits of such participation certificate.
The plaintiffs contend that they are not called upon to so elect and that they are not required to affirm or disaffirm whether or not they will claim to retain the benefits of the participation certificate; that their complaint states a good cause of action for a preferred claim against the defendants, and relying upon the case of Ex parte Hernlen, 156 S.C. 181, 188, 153 S.E., 133, 69 A.L.R., 443, which was affirmed in Winn v. Harby, 171 S.C. 301, 319, 172 S.E., 135, they have the right to pursue every remedy open to them for the collection of the amount turned over to the bank: that they could file their claim for preference as they have done in the present instance; could sue the directors; and resort to any other means of reimbursement, subject only to an estoppel arising in the event that they did anything amounting to a waiver of their present claim and to their discontinuing all other proceedings when in any one of such proceedings they obtain payment; that the remedies invoked by them in the respects indicated would not be inconsistent; that in all of them they would be merely seeking to recoup their loss against the various parties who under the law are responsible for the same; that the remedies available to them are cumulative, unless in their nature they are so inconsistent as to indicate that the adoption of one is an intentional relinquishment of the other.
I hold the plaintiffs' complaint herein is a straight suit for the recovery of the sum of $10,000.00 against the defendants as a preferred claim and that it is not necessary for them at this time, if at all, to affirm or disaffirm whether or not they would release or claim any benefits under the participation certificate referred to, and that this question can be properly determined when and if it arises after the trial of the present action.
The plaintiffs have requested that since the order to be made herein is an interlocutory order that does not involve the merits of the action, and does not finally determine any substantial matter forming a part of the cause of action or defense in the case, and that an appeal from this order would create unnecessary expense and delay to which the plaintiffs ought not to be subjected; and further that the motion herein be declared to be in the nature of a demurrer to the cause of action set forth in plaintiffs' complaint; that any appeal from this order should await an appeal from a final decree or judgment herein. Henderson v. Wyatt, 8 S.C. 112; Capell v. Moses, 36 S.C. 559, 562, 15 S.E., 711; Rhodes v. Southern Ry., 68 S.C. 494, 502, 503, 47 S.E., 689; McDaniel v. Atlantic Coast Line R. Co., 76 S.C. 189, 192, 56 S.E., 956, and cases cited therein; Steele v. Atlantic Coast Line R.R., 96 S.C. 460, 465, 81 S.E., 144; and Waring, Rec'r, v. Johnson, 152 S.C. 317, 321, 149 S.E., 840.
I hold that this order is in the nature of an interlocutory order and it does not involve the merits of the case, in that it does not finally determine any substantial matter forming a whole or a part of a cause of action or defense in the case, and that the motion herein is in the nature of a demurrer to plaintiffs' cause of action set forth in the complaint, and that it is to the best interests of all parties, including the depositors and other general creditors of the failed bank, that the case be heard without delay. I am satisfied that the ends of justice will be subserved by proceeding with the trial.
It is therefore ordered that the defendants' motion be, and the same is hereby, overruled and refused.
It is further ordered that no appeal from this order shall act as a supersedeas, but that the said action shall proceed to judgment with all convenient speed on its merits.
Messrs. Melton Belser, for appellants, cite: As to election of remedies by beneficiary of trust fund: 65 C.J., 981, 979, 980; 20 C.J., 44, 45, 13, 15; 26 R.C.L., 1322; 167 S.C. 327; 116 S.C. 450; 86 S.C. 162; 70 S.C. 229; 21 N.E., 172; 113 N.Y., 450; 4 L.R.A., 145; 156 S.C. 181; 171 S.C. 319; 167 S.C. 372; 136 S.C. 231; 268 U.S. 121; 69 L.Ed., 876; 288 F., 158; 3 How., 333; 11 L.Ed., 622; 69 Ga. 718; 101 N.E., 542; 169 P., 1161; 56 A., 906; 242 P., 157; 48 N.E., 128; 61 A.S.R., 132; 27 S.E., 260; 64 A.S.R., 854; 65 A.S.R., 241; 52 Am. Dec., 379; 38 A.S.R., 807; 27 S.E., 260; 64 A.S.R., 854; 86 S.C. 162; 68 S.E., 466; 138 A.S.R., 1037; 70 S.C. 240; 70 S.C. 229; 86 S.C. 162. Ratification and repudiation of unauthorized transactions: 20 C.J., 18; 136 S.C. 281; 167 S.C. 372; 122 S.C. 336; 138 S.C. 74; 158 S.C. 112; 91 N.E., 332; 137 A.S.R., 448; 85 N.W., 45; 52 L.R.A., 468; 48 P., 27; 6 S.W.2d 108; 21 N.E., 172; 113 N.Y., 450; 10 A.S.R., 479; 4 L.R.A., 145. Preference: 144 S.C. 147; 142 S.E., 239; 162 S.C. 107; 160 S.E., 156; 156 S.C. 181; 153 S.E., 133; 69 A.L.R., 443; 165 S.C. 161; 163 S.E., 466; 164 S.C. 63; 169 S.C. 456; 170 S.C. 61; 167 S.C. 1; 164 S.C. 261; 162 S.E., 458; 168 S.C. 242; 167 S.C. 327; 116 S.C. 450.
Messrs. W.B. Wilson, J.M. Blackmon and C.T. Graydon, for respondents, cite: As to trust ex maleficio: 144 S.C. 147; 122 S.C. 336. Election of remedies: 40 Minn., 424; 42 N.W., 206; 34 L.R.A. (N.S.), 310; 155 S.C. 386; 138 S.C. 74; 171 S.C. 301; 156 S.C. 181; 69 A.L.R., 443; 164 S.C. 63; 60 S.C. 122; 38 S.E., 453; 136 S.C. 511; 134 S.E., 510. Rights acquired by receiver: 34 Cyc., 191; 125 S.C. 214; 118 S.E., 303; 125 S.C. 332; 118 S.E., 290; 26 R.C.L., 1232.
February 19, 1936. The opinion of the Court was delivered by
It appears from the record that J.B. Swann departed this life the ____ day of April, 1932, leaving of force his last will and testament in which he named the Central Union Bank of South Carolina executor; on the 25th day of April, 1932, the will was duly proved and letters testamentary issued to said bank, which immediately thereafter assumed its duties as executor of said estate. By the terms of the will certain specific bequests were made, and the residue of the estate was devised and bequeathed, share and share alike, to Mrs. R.F. Bankhead, Miss May Blankenship, and John Swann Blankenship, Sr., who are the plaintiffs in this action. In April, 1932, apparently immediately after assuming its duties as executor, the Central Union Bank invested $10,000.00 of the cash assets of the estate in a pool of mortgages aggregating more than $68,000.00, and issued to the estate a participation certificate for the sum of $10,000.00.
This action was commenced in June, 1934, to recover an alleged preference in the sum of $10,000.00 out of the assets of the Central Union Bank, which had become insolvent and, under the provisions of the Reconstruction Finance Corporation, was in the hands of Simpson J. Zimmerman and J. Roy Barron as conservators-receivers under the Acts of the Legislature in such case provided. By proper proceedings the case was transferred from York County, where it was begun, to Richland County. The conservators-receivers filed a demurrer to the complaint which was heard and overruled by his Honor, Judge J. Henry Johnson, in an order dated March 7, 1935. Thereafter the defendants served notice on plaintiffs' attorneys that they would move before the presiding Judge of the Court of Common Pleas for Richland County for an order abating, discontinuing, and dismissing the complaint on the ground that the plaintiffs have no right to maintain this suit while at the same time retaining and claiming the benefit of the participation certificate referred to in the complaint. At the same time they filed an answer and return. The allegations of the complaint summarized, show the facts hereinabove set out, and the complaint further alleges that the investment of the $10,000.00 in the group mortgages was not made under authority of or order of the Probate Judge of York County, nor was the money invested in first mortgages on real estate, but these, plaintiff allege, that said investment was made knowingly, willfully, and intentionally in a participation certificate in a pool which was secured by mortgages for vastly larger sums than the value of the real estate would warrant as a fit, proper, or conservative investment; that this was in violation of its trust and in violation of the law in reference thereto and is contrary to Sections 9051, 7908, and 7909 of the Code of 1932; that the money of the Swann estate turned over to the Central Union Bank was by it mingled with other moneys, was not kept separate and distinct from other trusts, nor was the investment plainly marked; that the property in which it was invested was grossly inadequate then and now to secure the investment, and was known by the executor to be thus inadequate, and that it will be lost to the estate and these plaintiffs if it is allowed to stand; and that the investment trust is in such condition that it cannot be completed in a number of years and that the purpose and intent of the testator has been completely defeated; that by these methods the said executor has perpetrated a fraud on the estate and these defendants; and that it was negligent not to hold the funds in the bank ready for distribution at the proper time; that the plaintiffs did not consent to said investment, but on the contrary notified the bank that the funds would be needed at the end of the administration year and were assured by the trust officer of the bank that the funds were on hand and would be paid out. These plaintiffs allege that these transactions by the said bank are illegal, are null and void as a matter of law, and that they are entitled to establish what in law is known as a trust ex maleficio, and that these plaintiffs are entitled to have said amount above referred set aside as a preferred claim.
By their answer and return, the defendants set up, for a first defense, that the complaint does not allege and state facts sufficient to constitute a cause of action against these respondents for any preference in favor of plaintiffs, particularly in that (a) the complaint does not allege or show any acts or conduct on the part of the Central Union Bank which would entitle plaintiffs to a preference in the assets of said bank; and (b) the complaint does not allege or show that the plaintiffs have released their claim to the participation certificate referred to in the complaint. For a second defense they allege upon information and belief that the securities in which the plaintiffs hold a $10,000.00 participation certificate are probably good and collectible, and that the plaintiffs have not surrendered or released the benefits of said participation certificate, and the plaintiffs have no right to demand a preference in the assets of the bank while at the same time retaining the benefits of the participation certificate, and hence they are now estopped from maintaining and endeavoring to enforce this suit, and plaintiffs should be required to desist from the prosecution of this suit. For a third defense, admit the allegations of Paragraphs 1 and 2, except that they allege that Simpson J. Zimmerman and Roy J. Barron are acting as co-conservators-receivers. Answering Paragraphs 3, 4, and 5, they admit the same but crave reference to the original records referred to therein. Answering Paragraphs 6, 7, 8, 9, 10, 11, 12, 13, 14, and 15, they allege that they have no personal knowledge of the allegations and matters of fact therein set forth and therefore deny the same, except that they admit that they are informed that $10,000.00 of the said estate was invested in a participation certificate, and upon advice and belief they deny all the conclusions of law contained in said paragraphs and demand strict proof of all the allegations of the complaint. By way of further answer to all the allegations of the complaint, respondents allege that the Central Union Bank of South Carolina is insolvent, and has many other creditors, and upon information and belief the plaintiffs are not entitled to any preference in the assets of the bank as against the other creditors, and hence that all the relief prayed for in the complaint should be denied.
The matter came on for hearing before the Honorable G. Duncan Bellinger, Judge of the Fifth Circuit, who, on the 8th of July, 1935, filed an order, set out in the transcript of record, refusing the motion hereinabove referred to, that the suit be abated, discontinued, and dismissed. He further held that the plaintiffs' complaint is a straight suit for the recovery of $10,000.00 against the defendants as a preferred claim and that it is not necessary for them at this time, if at all, to affirm or disaffirm whether or not they would release or claim any benefits under the participation certificate referred to, and that this question can be properly determined when, and if, it arises after the trial of the present case.
It seems unnecessary to amplify the order of Judge Bellinger. In our judgment it is fully sustained by the decisions of this Court heretofore made in McMahan v. McMahon, 122 S.C. 336, 115 S.E., 293, 26 A.L.R., 1295; Ex parte Hernlen, 156 S.C. 181, 153 S.E., 133, 69 A.L.R., 443; and Winn v. Harby, 171 S.C. 301, 319, 172 S.E., 135. If the evidence produced upon the trial of the case sustains the allegations of the complaint, we think that under the rule laid down in the case of Ex parte Bank of Aynor, 144 S.C. 147, 142 S.E., 239, and the cases succeeding it and adopting the rule therein laid down, the plaintiffs would be entitled to have granted their plea that there be established in their behalf a trust ex maleficio upon the assets of the bank, which would entitle them to a preference.
All exceptions are overruled, and the judgment of the Circuit Court is affirmed.
MR. CHIEF JUSTICE STABLER and MESSRS. JUSTICES BAKER and FISHBURNE concur.
MR. JUSTICE CARTER did not participate.